Deck 26: Money and Output in the Short Run

Question 1

Business cycles typically last

A)from several months to several years.
B)less than one year.
C)more than five years.
D)more than ten years.

Answer 1

from several months to several years.

Question 2

Which of the following statements is correct?

A)Monetary expansions precede business cycle peaks, and monetary contractions precede business cycle troughs.
B)Monetary expansions precede business cycle troughs, and monetary contractions precede business cycle peaks.
C)Monetary expansions precede both business cycle troughs and business cycle peaks.
D)There is no consistent relationship between monetary expansions and contractions, and the business cycle.

Answer 2

Monetary expansions precede business cycle peaks, and monetary contractions precede business cycle troughs.

Question 3

When economists state that money is neutral in the long run, they mean that in the long run,

A)fluctuations in the money supply are equally likely to lead to recessions as to expansions.
B)changes in the money supply have the same impact on the rich as they do on the poor.
C)the level of output is independent of the nominal money supply.
D)the price level is independent of the nominal money supply.

Answer 3

the level of output is independent of the nominal money supply.

Question 4

Business cycles have been a feature of modern economies since

A)World War II.
B)1900.
C)1970.
D)the Industrial Revolution.

Question 5

Business cycles

A)have existed since the Industrial Revolution, but have been analyzed by economists only since the nineteenth century.
B)have existed since the nineteenth century, but have been analyzed by economists only since World War II.
C)have existed since World War II, but have been analyzed by economists only since 1980.
D)have existed since the Middle Ages, but have been analyzed by economists only since the Industrial Revolution.

Question 6

According to the real business cycle model, in the economy's short run equilibrium,

A)inflation must be zero.
B)output is as the full employment level.
C)productivity must be zero.
D)the supply of money must be constant.

Question 7

The growth rate of the money supply

A)increases during both booms and recessions.
B)increases during booms and falls during recessions.
C)falls during booms and increases during recessions.
D)falls during both booms and recessions.

Question 8

In the long run, one-time increases or decreases in the nominal money supply affect

A)real output, but not the price level.
B)the price level, but not real output.
C)both real output and the price level.
D)neither real output nor the price level.

Question 9

Movements in the growth rate of the money supply are

A)procylical.
B)countercyclical.
C)unrelated to the business cycle.
D)difficult to identify because the federal government has stopped collecting data on the money supply.

Question 10

Which of the following is NOT an explanation for short-run fluctuations in output in the real business cycle model?

A)A temporary shock to productivity
B)A decline in the availability of oil
C)An increase in the money supply
D)A major increase in workplace safety regulations

Question 11

The argument that changes in output cause changes in the money supply is known as

A)the liquidity effect.
B)the money multiplier effect.
C)reverse causation.
D)direct causation.

Question 12

According to the real business cycle model, the economy's short-run aggregate supply curve is

A)affected by monetary policy but not fiscal policy.
B)flatter than the long-run aggregate supply curve.
C)horizontal.
D)vertical.

Question 13

Which of the following is a correct characterization of the views of economists on the relation between changes in the money supply and changes in output in the short run?

A)Economists agree that changes in the money supply are responsible for subsequent changes in output.
B)Economists agree that changes in the money supply reflect, rather than cause, changes in output.
C)Economists disagree over whether changes in the money supply are responsible for subsequent changes in output or whether changes in the money supply reflect changes in output.
D)Economists disagree over whether changes in the money supply and changes in output are closely related in the short run.

Question 14

According to the real business cycle model, changes in the money supply will affect economic activity

A)in neither the short run nor the long run.
B)in the short run, but not the long run.
C)in the long run, but not the short run.
D)in both the short run and the long run.

Question 15

According to the real business cycle model,

A)prices are flexible in the long run, but not in the short run.
B)prices are flexible in the short run, but not in the long run.
C)prices are flexible in both the short run and the long run.
D)prices are inflexible in both the short run and the long run.

Question 16

During a business cycle expansion, output grows until it reaches

A)the physical maximum of production.
B)the level at which inflation begins.
C)a trough.
D)a peak.

Question 17

In the long run, the key reason that money is neutral is that

A)the federal budget is balanced.
B)prices are flexible.
C)business cycles have become much milder.
D)the nominal interest rate must equal the real interest rate.

Question 18

The low point in a business cycle is known as the

A)lower limit.
B)zero point.
C)trough.
D)peak.

Question 19

Periods of contraction in the business cycle are known as

A)expansions.
B)inflations.
C)recessions.
D)down ticks.

Question 20

When economists state that in the long run prices are flexible they mean that

A)inflation must be zero in the long run.
B)in the long run, firms adjust their prices to reflect changes in cost or demand.
C)changes in the nominal money supply have greater impact on the level of economic activity in the long run than in the short run.
D)a one-time increase in the money supply will affect output only in the long run.

Question 21

Ben Bernanke and Alan Blinder were able to document that

A)peaks in the rate of growth of the money supply actually follow, rather than precede, peaks in the business cycle.
B)increases in the federal funds rate cause output to fall.
C)increases in the federal funds rate cause increases in the inflation rate.
D)output declines almost immediately in response to a contractionary policy by the Fed.

Question 22

Milton Friedman and Anna Schwartz believe that their evidence indicates that money growth causes output fluctuations because they discovered that

A)nominal interest rates move inversely with changes in the money supply.
B)the Fed always responds passively to changes in money demand.
C)in many episodes, money changed as a result of a previous change in output.
D)in many episodes, money changes preceded output changes and were independent of them.

Question 23

In the new classical view, if the Chairman of the Fed announces a 10% increase in the money supply and then takes actions that cause the money supply to grow by more than 10%, the result will be

A)a 10% increase in the price level and no change in output.
B)a 10% increase in the price level and an increase in output.
C)a greater than 10% increase in the price level and an increase in output.
D)a greater than 10% increase in the price level and no change in output.

Question 24

In the new classical view, firms and workers

A)adjust their wages and prices, even in the short run.
B)do not adjust their wages and prices in the short run because they have imperfect information about changes in the price level.
C)increase their output when the price level is lower than expected.
D)fail to incorporate expectations of changes in the money supply into their forecasts of the aggregate price level.

Question 25

Milton Friedman and Anna Schwartz found in their study of money and business cycles from the Civil War to 1960 that

A)the growth rate of the money supply falls before output declines in every business cycle.
B)the growth rate of the money supply rises before output declines in every business cycle.
C)the growth rate of the money supply falls before output declines during some business cycles and rises before output declines during other business cycles.
D)there is no consistent relationship between money and output over the business cycle.

Question 26

Milton Friedman and Anna Schwartz conclude that

A)output fluctuations cause changes in money growth.
B)changes in money growth cause output fluctuations.
C)there is no causal link between the money supply and output.
D)there is no evidence for changes in the money supply that are not influenced by changes in output or by third factors that influenced both money and output.

Question 27

The book in which Milton Friedman and Anna Schwartz reported on their study of the relation between money and the business cycle is

A)Money through the Ages.
B)The General Theory of Employment, Interest, and Money.
C)A Monetary History of the United States.
D)Money and the Cycle.

Question 28

Milton Friedman and Anna Schwartz believe that money's impact on output appears

A)within a few months.
B)only in the very long run.
C)with a long and variable lag.
D)only in the very short run.

Question 29

Ben Bernanke and Alan Blinder found evidence that money is

A)neutral in the short run.
B)not neutral in the short run.
C)neutral in both the short and long run.
D)not neutral in the short or long run.

Question 30

According to the real business cycle model,

A)changes in money growth cause output fluctuations in both the short run and long run.
B)changes in money growth cause output fluctuation in the long run, but not in the short run.
C)there is no causal link between the money supply and output.
D)most observed changes in the money supply are independent of previous changes in output.

Question 31

In the new classical view, whether changes in the nominal money supply affect output in the short run depends on whether

A)the changes are expected or unexpected.
B)prices are flexible or inflexible.
C)the nominal interest rate is affected by changes in the money supply.
D)the Fed reacts passively or actively to the onset of recessions.

Question 32

The finding that output declines following the implementation of a contractionary policy by the Fed indicates that

A)reverse causation appears to explain the correlation between changes in money and changes in output.
B)money is neutral in the short run.
C)the real business cycle model's explanation of the correlation between money and output is incorrect.
D)money is neutral in the long run.

Question 33

According to the real business cycle model, the correlation between changes in the money supply and changes in output over the business cycle results from

A)changes in money causing changes in output.
B)changes in output causing changes in the demand for money, which leads the Fed to make changes in the money supply.
C)increases and decreases in the federal budget deficit, causing both the changes in money and the changes in output.
D)chance; the real business cycle model offers no other explanation for it.

Question 34

Milton Friedman and Anna Schwartz traced the recession of 1937-1938 to

A)the monetary contraction resulting from the Fed's increase in the required reserve ratio.
B)the monetary contraction resulting from a wave of bank failures.
C)the effects of World War II on the demand for U.S. exports.
D)the increased foreign exchange value of the dollar.

Question 35

New classical economists attribute the link between the money supply and output to

A)reverse causation.
B)sticky prices.
C)the difficulty the Fed has in adjusting the Fed funds rate.
D)imperfect information.

Question 36

In the new classical view, if the Chairman of the Fed announces a 10% increase in the money supply and then takes actions that cause the money supply to grow by 10%, the result will be

A)a 10% increase in the price level and no change in output.
B)a 10% increase in the price level and a small increase in output.
C)a less than 10% increase in the price level and a small increase in output.
D)a less than 10% increase in the price level and no change in output.

Question 37

According to Milton Friedman and Anna Schwartz, the loss of output during the early 1930s in the United States was due to

A)high tax rates imposed by the federal government.
B)the Fed's increasing of the required reserve ratio.
C)the stock market crash of 1929.
D)a wave of bank failures.

Question 38

Historical evidence suggests that the predictions of the real business cycle view are

A)accurate in the short run.
B)inaccurate in the short run.
C)inaccurate in the long run.
D)inaccurate in both the short and long run.

Question 39

Findings by various researchers have shown that

A)the money supply declines almost immediately in response to a contractionary policy by the Fed and that output declines with a lag of between six months and one year.
B)the money supply declines with a lag of between six months and one year in response to a contractionary policy by the Fed and output declines almost immediately.
C)the money supply and output decline almost immediately in response to a contractionary policy by the Fed.
D)the money supply and output decline with a lag of between six months and one year to a contractionary policy by the Fed.

Question 40

Christina and David Romer identify six independent monetary policy shifts after 1960 in which the Fed

A)increased the money supply when output increased and decreased the money supply when output decreased.
B)announced a contractionary monetary policy to fight inflation, after which output fell.
C)announced a contractionary monetary policy to fight inflation, after which output rose.
D)raised nominal interest rates in order to fight recession, after which the money supply rose.

Question 41

According to New Keynesians, why does an expected change in the money supply affect output in the short run?

A)Firms have imperfect information.
B)People expect central banks to increase the money supply in response to increases in output.
C)Many prices are set by long-term contracts and thus cannot respond quickly to increases in the money supply.
D)Prices are flexible in the short run.

Question 42

According to the new Keynesian approach, changes in the money supply will affect output

A)only if they are expected.
B)only if they are unexpected.
C)whether they are expected or unexpected.
D)only if they affect the price level.

Question 43

In terms of the AD-AS model, the new classical approach indicates that an unexpected decrease in the money supply will affect output because it will cause

A)the SRAS curve to shift down, whereas the AD curve will be unaffected.
B)the SRAS curve to shift up, whereas the AD curve will be unaffected.
C)the AD curve to shift to the left, whereas the SRAS curve will be unaffected.
D)the AD curve to shift to the right, whereas the SRAS curve will be unaffected.

Question 44

In the new Keynesian approach, an increase in the nominal money supply affects output by

A)directly increasing the wealth of consumers and, therefore, their spending.
B)reducing the real interest rate, thereby stimulating consumption, investment, and net exports.
C)allowing the government to increase its expenditures.
D)increasing the funds available for saving, thereby stimulating investment spending.

Question 45

Suppose that neither output nor the money supply has been growing. In the new classical view, if the Chairman of the Fed announces a 10% increase in the money supply and then takes actions that cause the money supply to grow by only 5%, the result will be that

A)the price level will increase, but output will decrease.
B)output will increase, but the price level will not.
C)neither output nor the price level will increase.
D)both the price level and output will increase.

Question 46

According to new Keynesians, which of the following is NOT an important source of price stickiness?

A)Imperfect competition among sellers in the goods market
B)Government wage and price controls
C)Long-term nominal wage contracts
D)Long-term nominal price contracts

Question 47

An increase in the money supply will result in a lower exchange rate because

A)the real interest rate on domestic assets will fall relative to the rates on foreign assets.
B)the real interest rate on domestic assets will rise relative to the rates on foreign assets.
C)it will lead to faster domestic growth, resulting in an increase in exports to other countries.
D)it will lead to lower inflation, thereby increasing the demand for domestic currency.

Question 48

An expected change in the money supply will result in a greater shift in the short-run aggregate supply curve in the new classical approach than in the new Keynesian approach because

A)households and businesses have rational expectations in the new classical approach but not in the new Keynesian approach.
B)households and businesses have rational expectations in the new Keynesian approach but not in the new classical approach.
C)prices are perfectly flexible in the new Keynesian approach, whereas prices are sticky in the new classical approach.
D)prices are perfectly flexible in the new classical approach, whereas prices are sticky in the new Keynesian approach.

Question 49

In terms of the AD-AS model, the new classical approach indicates that an expected decrease in the money supply will not affect output because

A)neither the AD nor SRAS curve will be affected.
B)the AD curve will shift left, but the SRAS curve will not shift.
C)the SRAS curve will shift down, but the AD curve will not be affected.
D)the AD curve will shift left, and the SRAS will shift down by the same amount.

Question 50

Which of the following is a correct reason why a decrease in the money supply will tend to cause stock prices to fall?

A)A decrease in the money supply will cause interest rates to rise, thereby shifting funds from financial to real investments.
B)A decrease in the money supply will cause interest rates to fall, thereby shifting funds from financial to real investments.
C)A decrease in the money supply will result in higher corporate profits in real terms.
D)A decrease in the money supply will cause interest rates to rise, thereby making bonds more attractive investments than stocks.

Question 51

An increase in the money supply will tend to raise stock prices and

A)reduce spending by consumers as they attempt to save in order to have the funds to buy more stock.
B)increase spending by consumers as their wealth increases.
C)decrease spending by firms as they cut back on buying new plant and equipment.
D)decrease spending by firms as they cut back on inventory holdings.

Question 52

Suppose that neither output nor the money supply has been growing. In the new Keynesian view, if the Chairman of the Fed announces a 10% increase in the money supply and then takes actions that cause the money supply to grow by 10%, the result will be

A)a 10% increase in the price level and no change in output.
B)a 10% increase in the price level and an increase in output.
C)a less than 10% increase in the price level and an increase in output.
D)a less than 10% increase in the price level and no change in output.

Question 53

New Keynesian economists provide which two reasons for price stickiness in the short run?

A)Imperfect information and imperfect competition
B)Long-term contracts and imperfect competition
C)Long-term contracts and imperfect information
D)Long-term contracts and perfect competition

Question 54

The new Keynesian approach shares with the new classical approach

A)the assumption of rational expectations.
B)the conclusion that money does not affect output in the short run.
C)the conclusion that only unexpected changes in the money supply affect output in the short run.
D)the assumption that the short aggregate supply curve is vertical.

Question 55

In the new Keynesian view, an increase in the real interest rate would cause firms to

A)increase their spending on plant and equipment.
B)increase the wages they pay their employees.
C)reduce their inventory holdings.
D)increase their reliance on borrowed funds.

Question 56

Available evidence suggests that

A)only expected changes in the money supply affect output.
B)only unexpected changes in the money supply affect output.
C)both expected and unexpected changes in the money supply affect output.
D)neither expected nor unexpected changes in the money supply affect output.

Question 57

Which of the following statements is true concerning the new Keynesian approach?

A)Only unexpected changes in the money supply affect output.
B)Only expected changes in the money supply affect output.
C)Unexpected changes in the money supply have a greater effect on output than do expected changes in the money supply.
D)Expected changes in the money supply have a greater effect on output than do unexpected changes in the money supply.

Question 58

In the new Keynesian view, an increase in real money balances increases investment spending by

A)giving business firms more funds to invest.
B)raising the real interest rate, which makes saving and investing more attractive.
C)lowering the real interest rate, which reduces the opportunity cost of investing in new plant and equipment.
D)allowing the government to increase its spending on bridges, highways, and other public works.

Question 59

In the new Keynesian approach, an increase in the nominal money supply

A)raises real balances in the short run but not in the long run.
B)raises real balances in the long run but not in the short run.
C)raises real balances in both the short and long runs.
D)does not raise real balances in either the short or long runs.

Question 60

The available evidence provides the most support to which perspective regarding the short-run effect of monetary policy?

A)New Keynesian
B)New classical
C)Real business cycle
D)Monetarist

Question 61

Which of the following is true of the new Keynesian view of stabilization policy?

A)It is necessary because shifts in aggregate demand are the main source of movements in current output.
B)It is necessary during recessions but not during booms.
C)It is unnecessary because output fluctuations reflect productivity disturbances.
D)It is unnecessary because output fluctuations are largely the result of policy mistakes by the Fed.

Question 62

A recession begins, but Congress and the President take eighteen months to decide the details of the tax cut that will be used to stimulate the economy. This is an example of

A)an implementation lag.
B)an impact lag.
C)a recognition lag.
D)a legislative lag.

Question 63

Followers of the new classical approach believe that for stabilization policies to be effective they must

A)be unexpected.
B)be announced before they are implemented.
C)take the form of monetary policy.
D)take the form of fiscal policy.

Question 64

The existence of lags in the policymaking and implementation process has convinced new Keynesian economists that stabilization policy should

A)not be used.
B)be used only to fine-tune the economy.
C)be used only to fight major downturns in the economy.
D)be used to fight inflations but not to fight recessions.

Question 65

In the new Keynesian view, expected changes in monetary policy can affect output in the short run because

A)agents do not have rational expectations.
B)prices are sticky.
C)business firms rarely pay attention to policy announcements.
D)they directly increase the funds available for businesses and consumers to spend.

Question 66

Which of the following accurately describes the new classical view of stabilization policy?

A)Changes in monetary policy do not affect output in the short run.
B)Policy changes which are unexpected are likely to introduce substantial uncertainty in household and business decisionmaking, causing output to become more volatile.
C)There's no need for stabilization policy since the economy operates at its full-employment level in the short run.
D)Rational expectations negates any effect of stabilization policy.

Question 67

In comparing the views of economists on stabilization policy in the 1960s with the views of economists on stabilization policy in the 1990s, one can say

A)few economists in the 1960s favored stabilization policy, while most economists in the 1990s favored stabilization policy.
B)economists' views on stabilization policy have changed very little since the 1960s.
C)fewer economists in the 1990s than in the 1960s believed it is possible to use stabilization policy to fine-tune the economy.
D)almost no economists in the 1990s believe stabilization policy should be used.

Question 68

Stabilization policy refers to attempts to

A)shift the AD curve to smooth short-run fluctuations in output.
B)shift the SRAS curve to smooth short-run fluctuations in output.
C)shift the AD curve to keep the price level as low as possible.
D)shift the SRAS curve to keep the nominal interest rate as low as possible.

Question 69

An expansionary monetary policy that successfully counteracts a recession has the side effect of

A)lower investment spending than if no action had been taken.
B)a larger government deficit than if no action had been taken.
C)a higher price level than if no action had been taken.
D)lower output than if no action had been taken.

Question 70

In the new Keynesian view a decline in consumer confidence that leads to a shift left in the AD curve

A)will cause output to fall in the short run, but not in the long run.
B)will cause output to fall in both the short run and the long run.
C)will not cause output to fall in either the short run or the long run.
D)will cause output to fall only if prices are fully flexible.

Question 71

Which of the following is true of the new classical view of stabilization policy?

A)It is necessary, but it should not be overused.
B)It is necessary during recessions but not during booms.
C)It is unnecessary because households and firms make use of all available information in forming expectations of the price level.
D)It has been very successful in the period since the Great Depression.

Question 72

Which of the following statements concerning stabilization policy is correct?

A)Increasing government spending during an economic boom would be an example of a stabilization policy.
B)Increasing taxes during a recession would be an example of a stabilization policy.
C)New Keynesian economists are skeptical of the value of stabilization policies.
D)Increasing the money supply during a recession is an example of a stabilization policy.

Question 73

Which of the following is true of the real business cycle approach to stabilization policy?

A)It is necessary, but it should not be overused.
B)It is necessary during recessions but not during booms.
C)It is unnecessary because output fluctuations reflect productivity disturbances.
D)It is unnecessary because output fluctuations are largely the result of policy mistakes by the Fed.

Question 74

Which of the following schools of thought among economists believe that unexpected changes in the money supply can affect output in the short run?

A)Only new Keynesian
B)Only new Keynesian and new classical
C)Only new Keynesian and real business cycle
D)New Keynesian, new classical, and real business cycle

Question 75

In 1992 the Central Bank of Japan resisted implementing an expansionary monetary policy because

A)it believed that output had been beyond its full-employment level in Japan during the late 1980s and early 1990s.
B)it followed the real business cycle approach.
C)it believed that the only way to cure Japan's economic problems was by reducing the large government budget deficit the country was suffering from.
D)it believed that the only way to cure Japan's economic problems was by reducing the large balance of trade deficit the country was suffering from.

Question 76

The economy begins to enter a recession, but it is several months before this is reflected in the statistics on GDP. This is an example of

A)a data lag.
B)an impact lag.
C)an implementation lag.
D)a legislative lag.

Question 77

The Fed decides to stimulate the economy by driving down the real interest rate. Months pass, however, before new factories and houses begin to be built in response. This is an example of

A)a data lag.
B)an impact lag.
C)a recognition lag.
D)an implementation lag.

Question 78

What strategy did Yasushi Mieno, Governor of the Bank of Japan, believe was appropriate in the face of declining aggregate output in Japan in the early 1990s?

A)He decided to use an expansionary monetary policy.
B)He decided to advise the Japanese government to use an expansionary fiscal policy, while keeping monetary policy neutral.
C)He decided to rely on economic expansion in the United States to increase demand for Japanese products.
D)He decided to wait for downward adjustment of the price level.

Question 79

According to the new Keynesian view, upturns and downturns in economic activity

A)may represent times when the economy is not at its long-run equilibrium.
B)are always the result of unexpected changes in the money supply.
C)cannot be offset by stabilization policy.
D)are unrelated to movements in aggregate demand.

Question 80

Which of the following schools of thought among economists believe that expected changes in the money supply can affect output in the short run?

A)Only new Keynesian
B)Only new Keynesian and new classical
C)Only new Keynesian and real business cycle
D)New Keynesian, new classical, and real business cycle